Garcia Padilla Administration seeks full Jones Act exemption to grow Puerto Rican Economy
by Michael Hansen, Hawaii Shippers Council
The new administration of Governor Alejandro Garcia Padilla through its cabinet secretary for economic development indicated earlier this month that they would seek a full Jones Act exemption for the Commonwealth of Puerto Rico as recommended last year in a report by the Federal Reserve Bank of New York, commonly known as the New York Fed.
In a wide ranging interview published on March 7, 2013, in the English language Caribbean Business newspaper, Mr. Alberto Bacó Bagué, Secretary, Economic Development & Commerce Department, outlined the Garcia Padilla Administration’s plan to reinvigorate Puerto Rico’s ailing economy. The multisectorial plan involves 15 initiatives, many of which depend upon more efficient transportation arrangements for the island including seaborne transportation. The Secretary Bacó’s Department was formerly the Administracion de Fomento Economico and still popularly known as Fomento (Spanish meaning promotion).
The Jones Act is the popular name for Section 27 of the Merchant Marine Act of 1920, which requires that vessels be U.S.-built, U.S.-flag, U.S.-crewed and U.S.-owned to transport cargo between two domestic points.
2012 Election Results
Gov Garcia Padilla won a closely contested election in November 2012 defeating the incumbent former Governor Luis Guillermo Fortuño Burset by a narrow 0.6% margin and assumed office less than three months ago on January 2, 2013. The legislative election results were far more definitive. Gov Garcia’s party, Popular Democratic Party of Puerto Rico, PDP (in Spanish, Partido Popular Democratico de Puerto Rico, PPD), and commonly known as “Populares,” won majorities in both chambers of the Commonwealth’s Legislative Assembly. The PDP has a supermajority of 66.67% in the Senate with 18 out of 27 seats, and a simple majority of 55% in the House with 28 out of 51 seats. Gov Garcia is also a member of the national Democratic Party
The PDP supports an enhanced commonwealth political status for Puerto Rico similar to that of the Commonwealth of the Northern Mariana Islands (CNMI), which among other things is exempt from the Jones Act by the international treaty that led to its annexation..
Former Gov Fortuño is a member of the New Progressive Party of Puerto Rico, NPP (in Spanish, Partido Nuevo Progresista de Puerto Rico, PNP) and popularly known as the “Progresistas.” The NPP supports Statehood for Puerto Rico. Gov Fortuño is a member of the national Republican Party and while in office advocated a full exemption from the Jones Act for Puerto Rico.
Puerto Rico’s single non-voting delegate to congress, Representative Pedro R. Pierluisi Urrutia, formally known as the Resident Commissioner of Puerto Rico to the U.S. Congress, is the only member of Congress that serves a four year term. Rep Pierluisi was reelected defeating Rafael Cox Alomar (PDP) by a margin of 1.28 %, and will serve another four years until the end of 2016. Rep Pierluisi is a member of the NPP, but unlike former Gov Fortuño, is a member of the national Democratic Party and caucuses with the Democrats in Congress.
It would seem reasonable to assume that any federal legislative measure to exempt Puerto Rico from the Jones Act, either in full or in part, would, during the near to medium term, likely have to be introduced by Rep Pierluisi in the U.S. House of Representatives in order to achieve any success. Especially as the other members of Congress will look to the resident commissioner for leadership on the Jones Act issue as it applies to Puerto Rico.
Among the other unique features of Puerto Rico’s political system is that all members of the Commonwealth’s bicameral Legislative Assembly – Senate and House alike – serve concurrent four year terms. As such, the current 17th Legislature of Puerto Rico will remain in office until January 8, 2017. Candidates for governor and the resident commissioner traditionally stand for election together as “running mates.” The second-in-command administrative position typically held by an elected lieutenant governor elsewhere in the U.S., in Puerto Rico is the Secretary of State, who is appointed by the governor and approved by both chambers of the Assembly.
There are a total of six registered local political parties in Puerto Rico. After the two main local parties, i.e., the PDP and NPP, the third most important political party with only a single member in the Assembly is the Puerto Rico Independence Party (Spanish Partido Independentista Puertorriqueno, PIP) popularly known as the “independenistas.”
Puerto Rico’s modern economic history begins after the end of World War II in 1945 with the sharp decline of the centuries-old and once mainstay sugar and coffee agricultural industries. To transition the economy away from agriculture, in 1948 the U.S. federal government launched “Operation Bootstrap,” which invested heavily in the island’s infrastructure and achieved initial success with introduction of labor-intensive manufacturing industries. After the low wage industries first attracted to the island began moving to lower cost countries and causing significantly higher local unemployment, the federal government granted several tax incentives in the late 1960’s. Those incentives led to Puerto Rico becoming a haven for the manufacturing operations of the U.S. bio-pharmaceutical, medical device, electronic and textile industries.
Those 1960’s incentives and the additional tax breaks added later were terminated by 2006 leading to the so-called “Puerto Rico Economic Crisis” that began in 2005. As reported by Jesse Drucker in Bloomberg on December 19, 2011, “In 1976, Congress added a tax credit that effectively exempted from federal income taxes the profits that U.S. companies attributed to Puerto Rico. The combination of the break, proximity to the U.S. and plentiful industrial sites prompted multinational companies to flock to the island, with medical-device and pharmaceutical makers leading the way. Companies separately negotiated tax holidays from the Puerto Rican government.”
“By the mid 1990s, critics attacked the break as too expensive, costing the U.S. about $3 billion a year. In some industries, the tax subsidy was costing the U.S. as much as $72,000 per job, according to a study by the federal agency now called the Government Accountability Office. After a lobbying battle in 1996, the tax break was repealed, with a 10-year transition period for companies already benefiting from the credit. ‘It pulled the rug from under our feet,’ said William Riefkohl, executive vice president of the Puerto Rico Manufacturers Association.”
When former Gov Fortuño took office in January 2008, the Commonwealth was suffering from the so-called Puerto Rico Economic Crisis as termination of the manufacturing tax credits and very large budget deficits. Gov Fortuño and the NPP-controlled Assembly addressed the crisis with austerity budgets. During the single Fortuño term, local unemployment rate rose to 17.2%, approximately 20,000 government employees were laid off, and the total population of island declined as a result of out-migration.
Garcia Padilla Administration’s Economic Plan focuses on Shipping
As Gov Garcia Padilla and the PDP ran in 2012 on a platform critical of Gov Fortuño and the NPP’s austerity budgets with the support of the public worker unions and promising to grow the economy and create jobs; putting their economic plan in to effect and achieving tangible results over the next four years is a political imperative. They also need to deal with the Commonwealth’s structural budget deficits – the current deficit for 2013 is estimated to be $1.2 billion, and the solvency of the Government’s Employees Retirement System that has $37.3 billion in unfunded liabilities. (See Puerto Rico’s pension system in peril, Fox News, February 1, 2013.)
In his interview with Caribbean Business, Secy. Bacó endorsed the York Fed’s June 29, 2012 Report on the Competiveness of Puerto Rico’s Economy, which identified the Jones Act is a major impediment to revitalizing the island’s economy. The New York Fed recommended Puerto Rico be exempted from the Jones Act’s for a trial period of five (5) years in the same way the U.S. Virgin Islands are.
Further echoing the New York Fed, Secy. Bacó explained that future economic growth in Puerto Rico will depend on more efficient transportation. And, he said an important focus of the Governor’s 15 point economic plan is port development and capitalizing on the Panama Canal Expansion Project. The Panama project is now scheduled for completion in 2015 and will allow for the introduce very large – approximately 13,000 TEU (twenty-foot equivalent unit) capacity – post-Panamax containerships into the Caribbean for the purpose of transiting between Asian and Atlantic ports.
Secy. Bacó emphasized that the Garcia Administration will move aggressively to complete development of the languishing Rafael Cordero Santiago Port of the Americas in Ponce on the South Coast of Puerto Rico to become a significant regional port – sometimes referred to as a “megaport,” after the Rotterdam and Singapore models. In addition, Secy. Bacó mentioned there is also potential to develop the former Roosevelt Roads Naval Base for maritime and aviation facilities as part of their economic plan.
Secy. Bacó told Caribbean Business, “What we have to aspire to is making the Ponce port work as fast as possible, so by the time post-Panamax ships start going through the Panama Canal in 2014, we may have a fully operational port. That will bring economic activity to Ponce and the whole island. It's not just a ‘Ponce solution’ because if it is a Saudi Arabian investor group, for example, they will bring money for manufacturing facilities. I see so much potential there that we must not look at it strictly as a port. It's an issue in which we may be left completely out of the map if something isn't done quickly, and time is running out.”
In respect of developing the Port of Americas, Secy. Bacó continued, “I've already met with the Korean group this past week in their New York office. They came from Korea with the sole purpose of meeting with us and they reiterated their interest, which I found odd. I asked further because I wanted to delve deeper into the matter, and it turns out time is running out.”
Then Secy. Bacó referenced the New York Fed’s recommendation in respect of the Jones Act, “There are some very important [points] recommended by the Federal Reserve in a study. These [include] giving a five-year moratorium on the Jones Act shipping laws. When I met with the Koreans and asked them what is the most negative part of operating the Port of the Americas—that is one of the negatives—the U.S. shipping laws. I think we are close to the federal government understanding it is a restriction that has us drowning in certain dimensions. Therefore, we will push for that in Washington.”
Implications of Gov Garcia Padilla Administration’s Jones Act Policy
The five-year Jones Act moratorium for Puerto Rico proposed by the New York Fed and endorsed by Secy. Bacó on behalf of the Garcia Padilla Administration would be modeled after the exemption for the Virgin Islands of the United States since their annexation on March 31, 1817 and subsequently exempted from cabotage by Section 21 of the Merchant Marine Act of 1920.
If such a temporary exemption from the Jones Act and related cabotage laws were to be enacted by the U.S. Congress for Puerto Rico, it would in all likelihood result in a permanent exemption, as it would be very difficult to re-extend cabotage laws to the Puerto Rico trade as conditions would have changed so substantially after the five year period. It is very likely that after such an exemption were to come into effect, the domestic trade between the contiguous U.S. and Puerto Rico would come to be dominated by new entrant international carriers operating foreign flag ships completely displacing the incumbent Jones Act operators.
The only probable exception among the incumbent Jones Act carriers would be Crowley Maritime, which is one of the four mainline carriers currently operating in the domestic Puerto Rico trade. Crowley operates eight large Roll-on/Roll-off (R0/Ro) trailerbarges on the domestic trade lanes from Jacksonville, Florida, and Port Elizabeth, New Jersey, to San Juan, Puerto Rico. In addition, Crowley operates several liner container services from the contiguous U.S. to other Caribbean ports employing foreign flag containerships charging significantly lower and much more competitive freight rates on those international trade routes.
Although Crowley would be extremely unlikely to support a full Jones Act exemption for Puerto Rico, if such an exemption were to be enacted, they could cover Puerto Rico by expanding their existing foreign flag services and calling at Puerto Rico in conjunction with their other ports. As all the Crowley trailerbarges employed in the domestic Puerto Rico trade were built between 1970 and 1979, they are well past what is customarily considered their useful life and therefore would not represent a large sunk cost if they were to be made redundant by a Jones Act exemption.
The New York Fed quantified that the freight rates between the Contiguous U.S. and Puerto Rico are twice the cost for the same movements to nearby islands, especially the Dominican Republic and Jamaica. Additionally, while Puerto Rico’s cargo volume fell more than 20% over the decade of 2000-2100, there was a corresponding doubling of volume at Kingston, Jamaica, implying that cargo is moving from Puerto Rico to Jamaica for onwards shipment.
The concept of a establishing a regional port on Puerto Rico to cover the Caribbean is dependent on achieving the equivalent of foreign flag freight rates between the Contiguous U.S. and Puerto Rico, which could only be achieved with a full Jones Act exemption. Recognizing the comparative advantages of Jamaica as a location for a hub port for the reasons identified by the New York Fed, the World Bank in February 2013 extended their support to a major regional port development project in Jamaica.
The Korean group, which Sey. Bacó referred to in his interview, also recognized the high cost of Jones Act freight rates as a barrier to any plans they might have to base their regional operations on Puerto Rico and possibly participating in the development of the Port of Americas.
This is the source of Secy. Baco’s warning that “we may be left completely out of the map if something isn’t done quickly, and it turns out time is running out.” Because transshipment cargo has already moved from Puerto Rico to Jamaica, and Jamaica is moving ahead with development of a megaport facility with World Bank support.
However, at this point in time, It is very difficult to see how the Garcia Padilla Administration will overcome the U.S. cabotage barrier to establish the Port of the Americas as a regional hub port or magaport. Congress is very unlikely to enact a full Jones Act exemption for Puerto Rico. This despite Secy.Bacó’s optimism saying “I think we are close to the federal government understanding it is a restriction [the Jones Act] that has us drowning in certain dimensions. Therefore, we will push for that [a full Jones Act exemption] in Washington.”
The federal Government Accountability Office (GAO) should release before the end of March 2013 their report on the economic impact of the Jones Act on Puerto Rico, which Rep Pierluisi requested in late 2011. However, the GAO report is expected to focus on the U.S. built requirement of the Jones Act and not recommend a full exemption from the Jones Act for Puerto Rico. Rep. Pierluisi has said that he would be guided by the results of the GAO report, which may mean he would be reluctant to support a full Jones Act exemption for Puerto Rico.
There is a similarity between the Garcia Padilla Administration’s approach to economic development and that of Governor Eddie Baza Calvo (R) of Guam, who assumed office on January 3, 2011. Gov Calvo announced through his Council of Economic Advisors his economic development plan on April, 1, 2012, which included in point (2) “seeking an exemption from the Jones Act to make the price of everything on the island cheaper.”
Another alternative for the Garcia Padilla Administration might be to support the Hawaii Shippers’ Council’s noncontiguous trades – Alaska, Guam, Hawaii and Puerto Rico – Jones Act reform proposal. In a nutshell, the proposed reform would exempt the noncontiguous domestic shipping trades from the U.S. build requirement of the Jones Act for deep draft self-propelled ships. It does not propose to change the other Jones Act requirements in respect of the noncontiguous trades, i.e. that vessels must be U.S.-flag, U.S.-owned and U.S.-crewed.
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Caribbean Business: Fomento economic development team totally focused on job creation